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Small biz retirement options: Save on taxes, invest in your future

I recently wrote the following blog post for my friends at Cape Space, a terrific shared workspace facility in Hyannis.

For small business owners, keeping up with the day to day can be a challenge.

One area that small business owners often neglect is preparing for their own retirement.

Don’t let that be you. There are good retirement savings options for even the smallest businesses.

These retirement plan options, which are governed by IRS rules, can help you save money on taxes now and help you prepare for the future.

Here are three such plans aimed at small business owners. The details vary by plan type, but each one provides a tax break to business owners as an incentive to save for the future.

Be aware that in every case, if you have one or more employees, you will be required to make contributions on their behalf. However, that added expense can be worth it in terms of tax savings and the nest egg you will accumulate.

SEP IRA - This may be the best known retirement plan among small business owners and the easiest to set up. The basics: Business owners may contribute up to 25% of their compensation to a SEP IRA up to a maximum of $54,000 per year (as of 2017). This means their total annual compensation from the business must total $216,000. That’s a hefty sum for many small businesses.

Also, if the business has employees, the business must also make a 25-percent contribution for each eligible employee. That makes the SEP IRA most suitable for business owners with no employees other than a spouse.

SIMPLE IRA - This a good option for small business owners with 100 or fewer employees who want to offer a retirement savings plan but also keep things relatively simple and low cost. 

Think of it as a streamlined 401(k) with lower administrative costs and headaches. The SIMPLE IRA allows employees, including owners, to contribute up to $12,500 per year to the plan plus an extra $3,000 for those 50 and over.

The business is required to contribute on behalf of employees in one of two ways: Either, a 3-percent matching contribution for an employee who contributes themselves, or a 2-percent contribution of each eligible employee regardless of whether they put anything into the plan themselves.

Individual 401(k) - This plan is much like a regular 401(k) plan but it is meant strictly for business owners and their spouses. It is also sometimes is known as a solo 401(k) or one-participant 401(k).

The big advantage to an individual 401(k) is that it often allows for larger retirement contributions than what is possible through a SEP IRA or SIMPLE IRA. The employee contribution is $18,000 ($24,000 for those 50 and over) like a typical 401(k) plan plus it allows the business to contribute even more on the owner’s behalf up to a maximum total contribution of $54,000, depending on net business income.

The major disadvantage is that it cannot be used by small businesses once they bring on their first W-2 employee. The option then is to either convert to a full-scale 401(k) or open up a SIMPLE IRA to take the place of the individual 401(k).

A full-scale 401(k) plan can be a good solution for many businesses, but it will typically involve more expense and effort than any of the plans mentioned above.

For more detail on small business retirement plan rules, check out this IRS handbook: Choosing a Retirement Solution for Your Small Business. 

(888) 285-7705 | info@fourpondsfinancial.com